Can the ECB create money for a universal basic income?

Funding basic income through taxation is costly. At the same time, low consumer demand is a major worry. The European Central Bank could kill two birds with one stone by giving money directly to citizens.

Guest post by Teemu Muhonen, originally posted on taloussanomat.fiTranslation by Petri Flander

Finnish social welfare agency KELA’s basic income experiment has got plenty of attention in Finland and elsewhere. This is not surprising: in recent years various proposals for a basic income have been submitted by a growing number of scientists, politicians and non-governmental organizations in several countries.

According to a study by the Municipal Development Foundation, 51 percent of the Finnish population supports basic income. Last year, even greater support was found on surveys in France and the Spanish region of Catalonia.

The popularity of unconditional basic income can be explained by the fact that it can be argued from various standpoints: the left is attracted to the idea of eliminating poverty and making citizens freer; the right wants to simply welfare benefits, and encourage people to get out of benefits and take up whatever work is available.

There are problems with basic income models that still need attention. The most common of which was brought up last week In an interview on the Finnish public broadcaster Yle, history professor Juha Siltala brought up one of the most common objections: “We should really consider a basic income that you can really live on. But who pays it then?”

When KELA hinted that they might pay up to 800 euros per month, unconditional and tax-free, to participants in their basic income pilot, Canadian professor James Milligan dismissed the idea as “typical fiscal nonsense.” According to Milligan, if the amount was given to the whole population, it would require doubling the Finnish tax rate.

But what if a universal basic income is funded by other means, in addition to taxation?

The ECB to the rescue

In recent years, the European Central Bank (ECB) has tried to support the eurozone’s lagging inflation through “quantitative easing” (QE), a measure used by other central banks as well. The ECB has been buying securities from institutional investors such as banks, using large amounts of fresh money.

So far, national economies have not responded as hoped: despite the increase in the value of securities, consumer prices have stagnated.

Last year the leader of the British Labour Party Jeremy Corbyn promoted the idea of “People’s QE” in which the Bank of England would channel money directly to citizens, not banks.

The proposal received wide support, and many people believe the ECB should follow suit. Even former IMF chief economist Olivier Blanchard praised the idea.

The expression that Corbyn used is misleading, however, because in his proposal the money is not channeled directly to the public, but to government, which then uses it to stimulate the economy through infrastructure projects and other measures.

Another model was suggested by a group of 19 economists, who signed a letter published in the Financial Times (FT) in March last year. They proposed that the money should be given directly to citizens of the eurozone countries. The idea was to use ECB money to give 175 euros per month to each citizen for 19 months.

Economist Milton Friedman once called this kind of payments “helicopter money”: it is as if the money is just thrown at people from the sky, with no strings attached. Effectively, what the FT letter proposed was a eurozone-wide unconditional basic income paid by the ECB.

One problem with helicopter money is inflation

If the ECB funds infrastructure investment and fiscal policy, it strengthens the position of states substantially. The impact of a pan-European basic income would be the opposite. It would transfer a substantial part of social security funding from states to the ECB. In addition, allocation of money would be determined by citizens, not governments.

The FT letter did not call for a permanent and comprehensive basic income. After all, 175 euros per month is a significant sum in the poorest countries of Europe, but not much at all in countries like Finland.

There are other problems. If the ECB pays a higher basic income, rising demand could lead to massive inflation, unless production of goods increased at the same pace as demand. ECB’s quantitative easing has inflated equity prices for a long time, but sharp increases in the prices of real goods are generally considered more harmful to the economy.

In addition, direct monetary payments to states and citizens would be incompatible with the EU treaties and further limit ECB’s independence.

Despite these problems, a pan-European basic income would have a distinct advantage when compared to a national basic income. A national basic income in countries that attract most migrants would make them an even more popular destination. A pan-European payment would equalize the differences between countries.

Two birds with one stone?

One model discussed by basic income activists would entail that the ECB pays the same amount to all European citizens. The countries with higher living expenses would top up their citizens’ basic income from their national treasury, or from the common EU budget.

Such an arrangement may sound utopian, as it would require a major revision of existing national social security frameworks, and probably a reform of the entire financial system.

But the reality is that the challenges faced by the current welfare arrangements and the economic system are reaching a crisis point. Many jobs have been shredded, and, as technology advances, returns from labor and tax revenues no longer increase as labor productivity rises.

Still, we need money to sustain consumer demand and fund social security. A pan-European basic income financed by the ECB could solve both problems. There is no doubt that we will see more of such discussions in the public sphere in the near future.

About Guest Contributor

15 comments

It would be a great help for the Hungarian people’s basic income provided by the European Central Bank (helicopter money) here as unemployment is above 10% – and the rate charged to the monthly salary of the highest taxes in the EU.
– 16% personal income tax,
– 10% pension contribution
– 7% health insurance contribution
– 1.5% of the labor market contribution.

Permanent work is not possible.
(However, there is tension stemming from a lack of money in the family)
the country’s economy is practically uncertain future multi-well offshore business and Comrade Orban sweeper public workers operated.

I would ask the European Central Bank to help make available the basic income for Hungary.

Given that in Europe, Hungary has the highest tax burden, I think it is a significant reduction in the basic income tax (part) financing was lifted in that country.
In this way it would be easier for the ECB to finance.
The “Dialogue for Hungary” (PM) party for about 235 Euros imagine the basic rate of income per month.

It would be a great help for the Hungarian people’s basic income provided by the European Central Bank (helicopter money) here as unemployment is above 10% – and the rate charged to the monthly salary of the highest taxes in the EU.
– 16% personal income tax,
– 10% pension contribution
– 7% health insurance contribution
– 1.5% of the labor market contribution.

Permanent work is not possible.
(However, there is tension stemming from a lack of money in the family)
the country’s economy is practically uncertain future multi-well offshore business and Comrade Orban sweeper public workers operated.

I would ask the European Central Bank to help make available the basic income for Hungary.

Given that in Europe, Hungary has the highest tax burden, I think it is a significant reduction in the basic income tax (part) financing was lifted in that country.
In this way it would be easier for the ECB to finance.
The “Dialogue for Hungary” (PM) party for about 235 Euros imagine the basic rate of income per month.

I disagree. Normal (electronic) money is debt money, created by commercial banks when they make loans for mortgages and so on. Only the 3% that’s cash is created free of debt. Positive Money, the UK money reform campaign group is calling for all money to be created free of debt, for the government to spend into circulation. A basic income would be a good use of this central bank created money. http://positivemoney.org.uk/issues

@Outdoorsyman Basic income (basic income) has to be done globally and at the same time. It must be universal pay the World Bank and funded by #Nasdaq #Nikei bags #Dax #Ibex etc. and investment funds (@BlacKrock) #BlacKrock would generate: + Consumer + confidence + Growth in definiva win the whole economic and financial system. Debt (#Debit) of states even reduceria desapereceria time. The minimum universal income would be $ 1,000 per month. (Every worker would have the least and would have to set a maximum salary ratio from 1 to 3 minimum wage) taxas and also the consumption tax would be progressive income. In short we would have an economy and a financial system without uncertainty that would solve the problem of companies that is consumption. States would have no deficit. People could organize their lives and their participation status in the sitema of basic income of 1 to 3. There would be no poverty and inequality and migration between countries would be reduced. It is a feasible and fair to investors that we would all participating political issue in a sustainable planet xon clean renewable energy to combat climate change
@ahorapodemos #SiSePuede #PODEMOS

I’m concerned about the capture of language by elites (including some academics) that twists a proper understanding of basic income. One of the worst examples is the word “cost” and the way it is used to claim basic income is unaffordable as in the above article “….it would require doubling the Finnish tax rate.”

The unaffordability argument is pure myth. I’ve seen time and time again powerful groups and even some basic supporters claiming we can’t “pay” for basic income because the tax rate would be too high,

Assuming the basic income is paid tax-free, it must be added to the taxable income to get a total income. While the tax rate on EARNED income may rise considerably, it is very easy to demonstrate that the tax rate on the total income does not necessarily change much, if at all..

An income-neutral basic income is perfectly feasible where everyone gets pretty much the same net total income after tax as they do now. By definition, that “costs” absolutely nothing.

When the basic income is designed to be redistributive, those on higher incomes will pay more tax on their total income while those on lower incomes will pay less tax. The amount of redistribution need only be small (a couple of% of GDP) to eliminate poverty as it is usually defined..

So basic income is always affordable whether or not it is funded wholly from personal income tax.

This is a great idea,the ECB has nothing to lose by trying a small amount like 175 euros a month and seeing how it pans out,My guess is it would be a success.Unfortunately the ECB will be unable to do this at the moment as EU Treaties do not give them the power.The eurozone is a incomplete currency union in that is has no political permission to make such payments.
The Eurozone is simply trading bloc that shares a currency.It lacks the political legitimacy to implement anything other than current bank focussed QE and Sovereign debt purchases,very little of which reaches the lower levels of society.Draghi was asked about this and though he did not rule it out said he has to consult “others” to even consider it.It is therefore likely a non starter.

The inflation problem will always exist for a single state program, because one state can’t arbitrarily expand their currency without affecting exchange rates.

If sovereign debt was required to be backed with commons shares, that may be claimed by all adult humans on the planet, one each only, then each would receive an equal share of the interest paid on sovereign debt.

This would establish the structure to provide a global basic income.

Current sovereign debt would pay about $10 USD/mo, $20 if you count corporate sovereign debt. That would require the reinvestment of the money currently backing sovereign debt, (bonus)

This can be expanded. As an example: If each commons share is assigned a value of $1 million USD (equivalent), then a country, with its subordinate sovereign entities could borrow a maximum of $1M times its population, for reserve and working capital, paying a sustainable 1.2% interest.

In this scenario a country of 1 M adult citizens could acquire a debt, and treasury of $1 Trillion, and develop a plan to increase revenue to make the $12 billion in annual interest payments.

With each currency increasing proportionally by population, there is no inflationary pressure.

Allowing each sovereign individual access to some level of sovereign debt, for secured investment like home, farm, secured business interest, will reduce the interest burden on states.

We can not reasonably leave humans behind when there is an alternative.

Please consider the notion, and imagine how this level of enfranchisement would change, things.